Where are the Cheap Firms Internationally?

Where are the Cheap Firms Internationally?

February 4, 2015 Value Investing Research
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(Last Updated On: March 15, 2015)

Last week, Wes had a short post entitled, Where are the Cheap Firms?

The post showed that when we look at the cheapest stocks in the U.S. stock market, we see that a few industries predominate today, notably energy (mostly oil-related) and consumer discretionary.

We wondered what things looked like in developed international markets, but at a country level. That is, when we look at the cheapest stocks available worldwide, in which countries will we find the cheapest stocks?

First, what does the universe look like? We examine 1035 securities that are deep and liquid in the developed markets:

universe

 

It is worth noting that Japan has many more tradeable stocks than many of these other countries.

Country weigths based on stock-selection using EBIT/TEV:

ebit

 

Norway, with a 6% weight, actually has a higher EBIT/EV yield (at 20.22%) in its cheapest decile than Japan (at 14.69%), it has many fewer stocks, and so receives a lower allocation versus Japan’s 55% weight. In general, the world’s cheap stocks reside in Japan.

 

How about another valuation metric? P/E:

pe

 

A different story here: Japan has a huge weight, but Hong Kong plays a much bigger role.

What is “cheap” depends on how you define cheapness. However, some interesting bargain hunting can be found in Japan, Norway, and Hong Kong.

Good luck!


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

David Foulke

Mr. Foulke is currently an owner/manager at Tradingfront, Inc., a white-label robo advisor platform. Previously he was a Managing Member of Alpha Architect, a quantitative asset manager. Prior to joining Alpha Architect, he was a Senior Vice President at Pardee Resources Company, a manager of natural resource assets, including investments in mineral rights, timber and renewables. He has also worked in investment banking and capital markets roles within the financial services industry, including at Houlihan Lokey, GE Capital, and Burnham Financial. He also founded two technology companies: E-lingo.com, an internet-based provider of automated translation services, and Stonelocator.com, an online wholesaler of stone and tile. Mr. Foulke received an M.B.A. from The Wharton School of the University of Pennsylvania, and an A.B. from Dartmouth College.


  • Don

    How do you account for the fact that different countries have different historical average price ratios? What if Japanese stocks just have a lower EBIT/EV ratio versus other countries? Then, it seems like you would always overweight Japanese stocks, UNLESS you’ve found in your research that EBIT/EV is universal across countries.

    Have you examined just picking the companies in the cheapest decile (or quintile for countries with small numbers of public companies) in each country?

  • Great questions.

    We’ve done a lot of work on country by country trends, etc. Some countries come into favor, some go out of favor, but the true bottomline is as follows: You gotta buy cheap stuff. Period. Wherever it is.

    When you constrain yourself to “country weights,” or force yourself to buy stuff that isn’t cheap on an absolute basis, you look more and more like an index and perform more and more like an index.

    Unfortunately, if you want to exploit the value-investing “anomaly” you need to do things that aren’t intuitive and/or comfortable. This is why value investing is simple, but not easy. 🙁

  • Chris

    This is interesting. According to StarCapital’s CAPE numbers from 4/30/2015, Japan has a CAPE of 28, which is a pretty high value for their market overall. So for them to have so many stocks on the cheap end of the spectrum must mean there’s a pretty high deviation of valuations within the Japanese markets. Any idea on the reason why?

  • CAPE and EBIT/TEV yields tell completely different stories in Japan. One says expensive, the other says cheap, relative to the rest of the world.
    As far as dispersion, that probably has to do with the huge diversity in opinions on Japan. If you ask investors a simple question about where Japanese equities are heading you get 10 different answers….

  • Chris

    Thanks for the response! I did kind of make a bit of a leap in logic in assuming that these two value metrics would be on the same page. Interesting to know that there’s a decent bit of disparity between how CAPE and EBIT/TEV are valuing Japan right now.

    I can see your point about a diversity in opinions in Japan. I know there is still a large contingent of people who are extremely bearish due to the poor performance over the last 25 years combined with negative demographic trends (aging population, low reproduction rate, fiercely anti-immigration), but my personal opinion is that a good chunk of their poor performance in the stock market the past 25 years can simply be attributed to the need to work off one of the biggest market bubbles ever. That being said, I didn’t realize how high their CAPE still was until I looked at the StarCapital data earlier today.

    Anyways, I enjoyed this blog post and definitely found it interesting that there are still so many Japanese stocks producing good EBIT/TEV yields.

  • Adam

    Are you suggesting that a
    properly diversified value portfolio would look much like the pie charts above?
    Follow up question: historically, how would such a portfolio have performed
    compared to US Value and International Value indices?

  • dph

    Any insights as to why place like Russia, Hungary, and Brazil don’t make the chart but seem to inexpensive on a CAPE basis? I assumed CAPE and EBIT ratios would be more correlated.

    http://www.starcapital.de/docs/2015-06_MSCI_Country_CAPE_Keimling.pdf

  • We’d need to update those results, as I’m sure Greece has moved up the chain

  • dph

    Wes, what is your preferred measure (screen?) for looking for cheap stocks internationally?

    Also does elevated CAPEs and being below a 200ma in combination bode poorly for US index investors or is it just noise in the short run?

  • ebit/tev is my personal favorite.
    And yes, high valuations and bad technicals are never a good sign